Market Volatility Puts Algorithmic Trading in Spotlight

A Financial Times report examines whether recent market volatility is linked to the rise in algorithmic trading and quantitative investment strategies. The FT citing data from Morgan Stanley and JPMorgan notes that quantitative strategies manage at least $1.5 trillion and estimates that only about 10 percent of U.S. equity trading is now done by traditional investors. High-speed electronic trading was blamed for the “Flash Crash” of 2010, and another market crash in 2015 was partly attributed to algorithmic strategies that automatically adjust their market exposure according to volatility, the FT reported. Industry participants quoted in the report say such algorithmic trading is “wreaking havoc” on the markets, and one manager of a now-closed hedge fund has argued for the SEC to investigate the market impact of such strategies. The Wall Street Journal in a separate report notes that quantitative “trend-following” investment strategies can reinforce market volatility because they react to major price swings by crowding into the same trade. The FT notes, however, that market turmoil has always existed, and machines can make a “convenient, faceless bogeyman for fund managers who stumble.”